London Metal Exchange (LME): History, Trading, and How It Works

What Is the London Metal Exchange (LME)?

The London Metal Exchange (LME) is a global commodities exchange specializing in futures and options trading for base metals such as aluminum, copper, zinc, lead, and nickel, as well as precious metals like gold and silver.

It plays a central role in setting global benchmark prices for these commodities. Founded in 1877 and acquired by Hong Kong Exchanges and Clearing in 2012, the LME combines traditional open outcry trading with modern electronic platforms, maintaining its status as the world's leading metals marketplace.

How the London Metal Exchange (LME) Functions

The LME is one of the main commodities markets in the world and allows for the trading of metals options and futures contracts. It also lists futures contracts on its London Metal Exchange Index (LMEX), which is an index that tracks the prices of the metals that trade on the exchange.

Options and futures contracts on the LME are standardized with respect to expiration dates and size. Expiration dates are structured so that traders can choose from daily, weekly, and monthly contracts. Meanwhile, contracts are traded in sizes called lots, which vary from 1 to 65 metric tons in weight. Lot size will vary depending on the metal.

Market participants on the LME are typically looking to hedge risk or seeking to take on risk. A hedger might be a producer or consumer and seek a position in a future or options contract to protect from future price moves in the metals market. On the other hand, traders and speculators buy or sell metals futures or options to profit from short-term price moves.

A Historical Overview of the London Metal Exchange (LME)

The London Metal Exchange can be traced back as far as the opening of the Royal Exchange in London in 1571, where traders in metal and a range of other commodities began to meet. As Britain became a major exporter of metals, European merchants began to arrive to join in these activities.

According to the LME's website, the origin of the "ring" tradition began in the early 18th century in the Jerusalem Coffee House. Here, a merchant with metal to sell would draw a circle in the sawdust on the floor and call out "change!" All those wishing to trade would assemble around the circle and make their bids and offers.

In 2012, the LME was acquired by the Hong Kong Exchanges and Clearing. Global exchanges often consolidate to cut costs and improve chances in a competitive market. For example, the CME Group acquired the New York Mercantile Exchange (NYMEX) in 2008. NYMEX, in turn, had merged with the Comex commodities exchange in 1994, creating the largest physical commodity exchange at the time.

Methods for Trading Metals at the London Metal Exchange

The LME has three methods of trading metals: open outcry, through the LME Select electronic trading platform, or by telephone systems. The nature of commodity exchanges is changing rapidly. The trend is moving in the direction of electronic trading and away from traditional open outcry trading, where traders meet face-to-face or in trading pits.

In 2016, CME Group closed the NYMEX commodities trading floor. NYMEX was the last of its kind, but the bulk of its energy and metals volumes had shifted to computers. In a similar move a year earlier, the CME shut down a commodity trading floor in Chicago and ended a 167-year-old tradition of face-to-face trading in favor of electronic trading.

It is unclear how long the LME will be able to maintain its physical open outcry trading model. It is the only physical commodity exchange in Europe remaining. However, the rapid advancement and acceptance of electronic trading are not working in favor of the open outcry model.

The Tradition and Process of Ring Trading at the LME

"Ring trading" is the method by which certain types of investment business are conducted.

On the LME, trading activity occurs in five-minute intervals known as "rings" within a six-meter diameter circle (a particular type of trading pit). The pit contains two large display boards that show current prices. Each of the ring-dealing members has a fixed seat within the ring, behind which an assistant is permitted to stand to pass orders to the ring dealing member and to liaise with customers regarding market conditions.

Ring sessions are divided by trading instruments. For example, steel trading takes place during the first session from 11:40 am to 11:45 am and in the second session 1:10 pm to 1:15 pm GMT. Trading occurs in five-minute intervals in the following order: steel, aluminum alloy, tin, premium aluminum, copper, lead, zinc, nickel, and cobalt.

Ring trading at the LME occurs between 11:40 am and 5:00 pm, however, inter-office telephone trading is available 24 hours a day. Check the LME's website for a detailed schedule.

Practical Example: Trading on the London Metal Exchange

An investor looking to trade on the LME has three options: via the LME's electronic portal, LMEselect, the Ring, or on the 24-hour telephone market. Investors must conduct their trading through an LME member. Information on how to become a member as well as a list of LME-certified members is available on the exchange's website.

Once you have selected a method and member through which you will conduct your trading, the next step is deciding which type of contract and for what metal you're looking to purchase. The LME offers seven contracts for its fourteen underlying metals: futures, options, TAPOs, Monthly Average Futures, LMEminis, Trade at Settlement, and HKEX London Minis.

Once you have decided what and how you want to trade, simply log into your brokerage account and you're ready to go.

The Bottom Line

The London Metal Exchange (LME) is a global hub for metal futures and options, setting benchmark prices for base metals. Based in London and owned by Hong Kong Exchanges and Clearing, it combines international reach with centuries of history.

While electronic trading prevails, the LME preserves its signature open outcry sessions, serving both hedgers and speculators. Founded in 1571, it remains a resilient and essential force in global commodities markets.